A Disconcerting Lack of Hubris

I agree with everything in @jasonfreedman’s outstanding blog post about raising seed capital in today’s environment. I urge all seed stage entrepreneurs to give it a thorough read.

As Jason says, no investor should begrudge entrepreneurs for a strong fundraise in an attractive early stage financing market — but keep some perspective, this is a long game, and you can’t win it today at your seed stage financing.

I wasn’t able to make the YCombinator demo day this time due to a board meeting. But For context of what I’m talking about, let me anonymize and share a representative email exchange from the previous demo day:

Impressive presentation and interesting business. Would love to learn
more, if you’d be up for a meeting?
Josh

Hey Josh,

We’d definitely love to talk! We’ll look for you after this last round of presentations, but if we miss each other, we’ll be contacting everyone after demo day to set up meetings. Just to manage expectations, we haven’t set terms yet, but suspect it won’t be a good fit for a price-sensitive investor.

On the one hand, I do appreciate the team saving me the time of taking that meeting.

Now, I know I don’t have a reputation for saying: “price is no object, where can I wire the money?” (though, I’d encourage you to think about what the job of a professional investor is. Price is a fundamental element that drives our returns, ableit not the only one or even the primary one. But if you select only for the irrational investor, don’t be surprised if, down they line, they don’t behave rationally when you need them to.)

I’ve invested in three YC startups of recent vintage, and in all cases, I’ve paid the market price without fanfare — the market is what it is, and while I feel the prices a bit rich, there’s no use in getting worked up over it on a small seed. But to Jason’s point in the blog post, is that really the sole filter you want to place on who your investors will be? Is that really the tone with which you want to start a relationship — at the seed stage?

To seed stage entrepreneurs, I say: rejoice! This is an environment where you can have your cake (attractive pricing) and eat it too — helpful investors, be they angels, or professional investors with real company building expertise. Go strike a deal that gives you the fuel to run, and celebrate your ability to deliver them a fair (or even handsome) return for demonstrating faith that you, a recent college grad who just thought up your business idea nine weeks ago, will build a giant, awesome business. And in that faith, they agree that (on paper) your startup, which is basically two of you and a few thousand lines of code — is worth SEVEN MILLION DOLLARS, today, before they put their hard earned cash in.

It’s a temporal opportunity — available only now, and only in this wonderful valley — and kudos to you for seizing it. Make the most of it, but don’t take it for granted, assume it will always be so, or handle it without the grace it deserves. As Jason aptly points out, we’ll all be working together for a long time.

One Response to “A Disconcerting Lack of Hubris”

What most entrepreneurs don’t get is that there is a huge amount of risk in these startups for them as well. Skyrocketing the valuation early may mean that you make additional millions if you build a billion dollar company, but it’s the equivalent of pushing all of your chips to the middle of the table before you’ve seen the flop.

Most of the time, that’s pretty stupid.

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What most entrepreneurs don’t get is that there is a huge amount of risk in these startups for them as well. Skyrocketing the valuation early may mean that you make additional millions if you build a billion dollar company, but it’s the equivalent of pushing all of your chips to the middle of the table before you’ve seen the flop.